Setting prices is one of the hardest calls a small business owner makes. Charge too little and you work hard for very thin returns. Charge too much and customers may look elsewhere. The good news is that pricing does not have to be guesswork.

This guide walks through a simple process for setting prices, based on government guidance for small business. It covers working out your costs, the main pricing strategies and the legal rules to keep in mind. It also looks at how often to review what you charge. The ideas apply to online stores and service businesses alike.

Start with your pricing goals

Before you pick a number, decide what you want your prices to do. The business.gov.au guide to choosing a pricing strategy lists goals such as profit, market share, brand reputation and demand. Your goals should line up with your business plan and your marketing plan. A new online store chasing its first customers may set different prices to an established brand. Knowing your goal makes the later choices much clearer.

Your goals also depend on how much money you have to work with. If you are bootstrapping a business on minimal capital, steady cash coming in may matter more than market share. Low prices that leave no margin can sink a small business quickly. Be honest about how long you could keep going on a thin margin.

Work out what each sale really costs

The business.gov.au guide says to work out what it costs to make each product or service, then add your profit margin. For goods, that means materials, labour, overheads and taxes including GST. For services charged by the hour, your rate needs to cover wages, superannuation, leave entitlements and taxes. Many owners forget to pay themselves when they do these sums. Include a fair wage for your own time.

Overheads are easy to underestimate. Rent, software, insurance and cleaning all need to be covered by your prices. Even a deep clean for your business premises is a cost that has to come from somewhere. Online businesses also carry website, payment and platform fees. Add them up over a year and spread them across your expected sales.

Delivery is another cost that catches online sellers out. Postage, packaging and freight can wipe out the margin on low priced items. Larger or bulk orders may need a different approach, and freight transportation brokers can help some businesses manage shipping. Decide if you will build delivery into your prices or charge it separately. Either way, show the total clearly to customers.

The main pricing strategies

Once you know your costs, you can choose how to set prices on top of them. The business.gov.au guide describes several common strategies. Most businesses use one as a base and adjust it over time. Here is a quick summary of each.

• Cost plus pricing: add up your costs, then add a markup or margin.
• Charging by the hour: common for contractors and service providers, with the rate covering all business costs.
• Going rate pricing: set prices at or near the market leader, using competitor prices as a guide.
• Value pricing: base the price on what the product gives customers rather than only on its cost.
• Premium pricing: charge more for luxury, prestige or exclusive offerings.
• Penetration pricing: start low to win customers, then raise prices once you reach your goals.
• Skimming pricing: start high for early buyers, then lower prices as the market widens.
• Loss leader pricing: sell some items below cost to bring people in, then recover the loss on other sales.
• Dynamic pricing: change prices with demand, the time of day, the season or stock levels.

The guide warns that loss leaders can cut into profits if they are not managed well. Penetration pricing needs a plan for when and how prices will rise. Premium and value pricing rely on customers seeing a clear benefit. That benefit needs to come through in your product pages and your marketing.

Research your market and your customers

Competitor prices are a useful guide, but the guide advises against copying them exactly. Compare features, quality and customer service as well as price. Your price still needs to cover your costs and reflect the full value of what you offer. A cheaper competitor may be running on a margin you could not live with.

Talking to customers is just as useful. Ask what they value most and test what they are willing to pay. Products that save time or offer clear benefits may support a higher price. Good content marketing for small business helps explain that value before a customer ever sees the price. Clear explanations make a higher price easier to accept.

Using discounts without losing money

Discounts can attract new customers, clear old stock and encourage repeat business. Common options include special offers, bundles, quantity discounts, added value offers and seasonal sales. Plan when and how you will use them rather than discounting on impulse. Check that each discount still covers your costs. A discount that loses money on every sale is hard to recover from.

Keep your pricing within the law

Pricing has legal limits, and the business.gov.au guide lists several of them. You must never agree with competitors on the prices you charge, as price fixing is illegal. You can suggest a recommended retail price to resellers, but you cannot force or threaten them to use it. Selling below cost for a sustained period to push competitors out is also off limits. Dynamic pricing is legal as long as prices are clear, fair and not misleading.

Prices you display must be clear, accurate and not misleading. If you show more than one price for a product, you must sell it at the lower price or remove it from sale until the error is fixed. Price comparisons, such as was and now prices, must be truthful. At the time of writing, the guide also says you cannot add surcharges for credit, debit or prepaid card payments. Other surcharges, such as weekend or public holiday fees, may be allowed.

Review your prices regularly

Prices should not be set once and forgotten. The guide recommends reviewing them at least once a year. You should also review them whenever your costs or market conditions change. Keep a simple record of your costs so you can spot when margins start to shrink. An accountant or business adviser can help you check your numbers.

Frequently asked questions

What is the simplest pricing strategy for a new business?

Cost plus pricing is often the easiest place to start. You total your costs and add a margin on top. It gives you a price that covers your expenses. You can then adjust it once you know more about your market.

Should I just match my competitors?

Competitor prices are a good guide but not a full answer. Your costs and your offer may be quite different. Compare quality, features and service before deciding. Make sure your price covers your own costs first.

How often should I change my prices?

Government guidance suggests reviewing prices at least once a year. Review them sooner if your costs rise or your market changes. Let regular customers know about changes ahead of time where you can. Explain the reason in plain words.

Can I charge a card surcharge?

At the time of writing, business.gov.au says businesses cannot add surcharges for credit, debit or prepaid cards. Some other surcharges, such as weekend or public holiday fees, may be allowed. Fees like these should be shown clearly so the price is not misleading. Check the current guidance before adding any fee to your prices.

This article is general information only and is not financial or legal advice. For advice about your own business, speak with an accountant or qualified business adviser.